What to Watch for at China's 'Third Plenum'

The Third Plenum of the 18th Communist Party of China is expected to take place between Nov. 9 and 12 in Beijing and expected to result in a slew of economic reforms that could be crucial for the long-term trajectory of the Chinese economy and society. As it happens, what economic reforms China adopts will have an immense impact on the global economy and thus investors, economists, and political analysts alike are watching the Third Plenum with keen interest. Given its importance, The Diplomat saw it fit to compile a rundown of what reforms are likely to be on the CCP’s agenda this weekend.

So what is the Third Plenum anyway, and what were the first two? To begin with the latter of these questions, the First Plenum – the first meeting of China’s Central Committee where a once-a-decade Party leadership change takes place – generally is a glorified meet-and-greet for the new leadership. For the 18th CPC, the First Plenum took place in November 2012 when Xi Jinping ascended to the helm of the Chinese Communist Party (CCP). The Second focuses on administrative affairs and party discipline, and it is where the individuals who took over the Party leadership at the First Plenum officially take their state positions. For example, at this year’s Second Plenum Xi Jinping officially became China’s president, after becoming the general secretary of the CCP in November.

The Third is where creativity abounds and substantive reforms are announced. Readers of The Diplomat will be aware of Deng Xiaoping’s groundbreaking reforms beginning in the late-1970s – these were indeed announced at the Third Plenum in 1978 and have come to define China’s economic trajectory since then.

While there has been much speculation about what the upcoming Third Plenum meeting might yield in terms of concrete reforms, little is known for sure. China’s state news agency and avid reader of The Diplomat, Xinhua News Agency, is expected to announce the results of the Plenum upon its conclusion on Tuesday. Of course, the Third Plenum could fizzle this year and not produce the kind of groundbreaking reform many expect it to deliver; in any case, whatever changes are announced will take years to materialize given the CCP’s tendency to implement reforms gradually.

There are a number of reforms that experts expect to see addressed during the Third Plenum this weekend. On the financial front, the issue of interest rate ceilings is one long overdue area of reform that will almost certainly be addressed. China has maintained a ceiling on bank deposit rates which disproportionately benefits financial institutions and state-owned enterprises (SOEs) to the detriment of consumers. Given China’s desired shift towards a more demand-driven model of growth, the interest rate ceiling may be discarded in favor of allowing banks to compete for consumers by offering higher interest rates. Also on the banking front, the Third Plenum may result in China adopting a model similar to the United States’ Federal Deposit Insurance Corporation (FDIC) that could guarantee the accounts of individual depositors up to a certain amount in the case of default. The cherry on top of these financial reforms could be a long-awaited change in capital controls, drawing more foreign investors to Chinese equities and bolstering the renminbi as a global currency.

Public finance and fiscal policy may be on the reform agenda as well. Chinese local governments, overburdened with toxic debts, may be allowed to take greater initiative in seeking out creative financing options. Beijing has been reluctant to encourage this in the past, owing to concerns about corruption, but external observers have noted that loosening regulations on this front is somewhat inevitable if the CCP wants local governments to remain solvent.

Outside of these big-picture changes, there is speculation that some reforms may be on the way for China’s hukou permit system and state-owned enterprises (SOEs) – although these are problematic for a variety of reasons. The hukou system has generally been considered a bureaucratic impediment to increased urbanization. If the CCP is to successfully move the Chinese economy into a demand-driven model based around consumption, it needs to encourage migration into its cities, which often have vast swathes of empty residential real estate. However, this move is expected to encounter blowback from local governments who may be unwilling to take on the costly burdens that increased urbanization would entail. The SOEs are a trickier issue for the CCP given their vast political sway and entrenched leaderships, but in general, it is expected that the Third Plenum will result in measures to increase the level of inter-SOE competition to bolster performance.

Global investors will be waiting for Xinhua’s Tuesday report with bated breath. Whatever the outcome of the Third Plenum, what is a certainty is that it will affect global markets. It is likely that all of the aforementioned reforms may not be enacted by the Third Plenum; instead they will be silently disseminated gradually via local governments to avoid the grand political pomp and circumstance that often accompanies the Third Plenum’s report.

Ankit Panda is Associate Editor of The Diplomat. Follow him on Twitter at @nktpnd.